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Fundamentals Level ? Skills Module, Paper F7 Financial Reporting

Section A

1B

September 2016 Answers

2A

3A

The repayment of the grant must be treated as a change in accounting estimate. The carrying amount of the asset must be increased as the netting off method has been used. The resulting extra depreciation must be charged immediately to profit or loss.

Cost Grant

Depreciation Carrying amount

Original

90,000

(30,000) ??????? 60,000

(10,000) [1 yr] ??????? 50,000 [1/1/X7]

As if no grant 90,000

(30,000) [2 yr] ??????? 60,000 [31/12/X7]

Adjustment

Dr Depn exp 20,000 Dr PPE 10,000

Cr Liability 30,000

4A

5C 710,000 + (480,000 x 3/12) ? (20,000 x 3) + (20,000 x 25/125) = $774,000

6D

7D

8C

Net total being paid over four years (($5,000 x 4 years) ? $1,000) Annual charge spread evenly over the lease term ($19,000/4 years)

19,000 4,750

9A

10 A 3,250 + 1,940 + ((800 ? 600) x 30%) = 5,250,000

11 C

12 D FV of NCI at acquisition Profit for year x 30% Depn on FVA (1?5m/30) Unrealised profit

13 B

3,200

(50)

(550) ?????? 2,600 x 30%

1,100

780 ?????? 1,880 ??????

21

14 B

Retained earnings = 300 + ((150 ? 90) x 75%) = 345 Total equity = 125 + 345 = 470

15 B

Production cost of PPE Capitalisation of borrowing costs: $6m x 6% x 9/12 = Total cost capitalised (and carrying amount) at 30 September 20X2

Section B

16 D Depreciation 1 January to 30 June 20X4 (80,000/10 x 6/12) = 4,000 Depreciation 1 July to 31 December 20X4 (81,000/9 x 6/12) = 4,500 Total depreciation = 8,500

$'000 6,000

270 ?????? 6,270 ??????

17 D

18 B VIU is lower than FV (less costs to sell), so impairment is 60,750 ? 43,000 = $17,750

19 D

20 A

The impairment loss of $220m (1,170 ? 950) is allocated: $35m to damaged plant and $85m to goodwill, the remaining $100m allocated proportionally to the building and the undamaged plant. The carrying amount of the plant will then be $262,500.

21 B

22 C

Yr 1 2,000,000 x 11?65% = 23,300 Yr 2 (2,000,000 + 23,000 ? 55,000) x 11?65% = $19,607

23 B

24 B

25 A Profit on sale = 120,000 (370 ? 250) spread over 5 yrs = $24,000

26 A

27 B 1,000/1,500 x 1,200 = $800

22

28 D 500/1,500 x 1,200 = 400/2 = $200

29 C

$30,000 (400 ? 500 x 30%). Revaluation and deferred tax of headquarters goes through OCI.

30 B

$60,000 (200 x 30%) Dr Income tax expense Cr Deferred tax liability

Section C

31 (a) Triage Co ? Schedule of adjustments to profit for the year ended 31 March 20X6

Draft profit before interest and tax per trial balance Adjustments re: Note (i) Convertible loan note finance costs (w (i)) Note (ii) Amortisation of leased property (1,500 + 1,700 (w (ii))) Depreciation of plant and equipment (w (ii)) Note (iii) Current year loss on fraud (700 ? 450 see below) Note (iv) Income tax expense (2,700 + 700 ? 800 (w (iii)))

Profit for the year

$'000 30,000

(3,023)

(3,200) (6,600)

(250)

(2,600) ??????? 14,327 ???????

The $450,000 fraud loss in the previous year is a prior period adjustment (reported in the statement of changes in equity).

The possible insurance claim is a contingent asset and should be ignored.

(b) Triage Co ? Statement of financial position as at 31 March 20X6

Assets Non-current assets Property, plant and equipment (64,600 + 37,400 (w (ii))) Current assets Trade receivables (28,000 ? 700 fraud) Other current assets per trial balance

Total assets

Equity and liabilities Equity Equity shares of $1 each Other component of equity (w (i)) Revaluation surplus (7,800 ? 1,560 (w (ii))) Retained earnings (w (iv))

Non-current liabilities Deferred tax (w (iii)) 6% convertible loan notes (w (i))

Current liabilities Per trial balance Current tax payable

Total equity and liabilities

$'000

27,300 9,300

???????

2,208 6,240 17,377 ???????

3,960 38,415 ??????? 17,700

2,700 ???????

(c) Diluted earnings per share (w (v))

$'000

102,000

36,600 ???????? 138,600 ????????

50,000

25,825 ????????

75,825

42,375

20,400 ???????? 138,600 ???????? 29 cents

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Workings (monetary figures in brackets in $'000)

(i) 6% convertible loan notes

The convertible loan notes are a compound financial instrument having a debt and an equity component which must both be quantified and accounted for separately:

Year ended 31 March

20X6 20X7 20X8 Debt component Equity component (= balance) Proceeds of issue

outflow $'000 2,400 2,400 42,400

8%

0?93 0?86 0?79

present value $'000

2,232

2,064

33,496 ??????? 37,792

2,208 ??????? 40,000 ???????

The finance cost will be $3,023,000 (37,792 x 8%) and the carrying amount of the loan notes at 31 March 20X6 will be $38,415,000 (37,792 + (3,023 ? 2,400)).

(ii) Non-current assets

Leased property The gain on revaluation and carrying amount of the leased property is:

Carrying amount at 1 April 20X5 (75,000 ? 15,000) Amortisation to date of revaluation (1 October 20X5) (75,000/25 x 6/12)

Carrying amount at revaluation Gain on revaluation = balance

Revaluation at 1 October 20X5 Amortisation to year ended 31 March 20X6 (66,300/19?5 years x 6/12)

Carrying amount at 31 March 20X6

$'000

60,000

(1,500) ??????? 58,500

7,800 ??????? 66,300

(1,700) ??????? 64,600 ???????

Annual amortisation is $3m (75,000/25 years); therefore the accumulated amortisation at 1 April 20X5 of $15m represents five years' amortisation. At the date of revaluation (1 October 20X5), there will be a remaining life of 19?5 years.

Of the revaluation gain, $6?24m (80%) is credited to the revaluation surplus and $1?56m (20%) is credited to deferred tax.

Plant and equipment

Carrying amount at 1 April 20X5 (72,100 ? 28,100) Depreciation for year ended 31 March 20X6 (15% reducing balance)

Carrying amount at 31 March 20X6

$'000

44,000

(6,600) ??????? 37,400 ???????

(iii) Deferred tax

Provision required at 31 March 20X6: Revalued property and other assets (7,800 + 12,000) x 20%) Provision at 1 April 20X5

Increase in provision Revaluation of land and buildings (7,800 x 20%)

Balance credited to profit or loss

(iv) Retained earnings

3,960

(3,200) ???????

760

(1,560) ???????

(800) ???????

Balance at 1 April 20X5 Prior period adjustment (fraud) Adjusted profit for year (from (a))

Balance at 31 March 20X6

3,500

(450)

14,327 ??????? 17,377 ???????

(v) The maximum additional shares on conversion is 8 million (40,000 x 20/100), giving total shares of 58 million.

The loan interest `saved' is $2?418m (3,023 (from (w (i)) above x 80% (i.e. after tax)), giving adjusted earnings of $16?745m (14,327 + 2,418).

$16,745,000 x 100 Therefore diluted EPS is ?????????????????? = 29 cents

58 million shares

24

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